Ejaz Tanning Company, Chennai vs Assessee

अपीलाथ, क/ ओर से/Appellant by : Shri Raghav Prasad, ACA -.यथ, क/ ओर से/Respondent by : Shri Joe Jebastian, CIT

सन ु वाई क/ तार ख/Date of Hearing : 18.05.2015 घोषणा क/ तार ख/Date of Pronouncement : 29.05.2015

आदे श /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

This appeal of the assessee is directed against the order of

the Commissioner of Income Tax, Chennai-9, Chennai, dated

19.12.2014 and pertains to assessment year 2011-12. 2 I.T.A. No.389/Mds/15

2. Shri Raghav Prasad, the Ld. representative for the assessee,

submitted that the Assessing Officer completed the assessment

under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act')

by an order dated 31.12.2013. However, the Commissioner, in

exercise of his power under Section 263 of the Act, found that the

order of the Assessing Officer is erroneous and prejudicial to the

interests of Revenue. Referring to the impugned order of the

Commissioner, the Ld. representative submitted that the

Commissioner observed that the assessment order was completed

in undue haste without conducting necessary investigation and

without application of mind to the relevant material. According to

the Ld. representative, the Assessing Officer called for the details,

namely, bank statements, details of commission paid, TDS, audit

report, the details of the parties who filed Form 15G, etc. The

assessee also filed confirmation letters from the creditors before the

Assessing Officer. Therefore, it is not correct to say, according to

the Ld. representative, that the Assessing Officer has not conducted

any necessary enquiry. The Ld. representative submitted that of

course, the Assessing Officer has not referred anything in the

assessment order with regard to nature of enquiry conducted and

the documents examined by him. It does not mean, according to

the Ld. representative, that the Assessing Officer has not applied 3 I.T.A. No.389/Mds/15

his mind to the facts of the case. Referring to the each and every

relief given by the Assessing Officer, the Ld. representative

submitted that with regard to Duty Drawback, the assessee-firm

earned profit even if the Duty Drawback was excluded from the

gross profit. The Ld. representative further pointed out that

comparison of Duty Drawback is to be made only with gross profit

and not with net profit. The Ld. representative submitted that

Customs Duty Drawback only is in the nature of incentive.

Referring to the Integrated Development of Leather Sector, the Ld.

representative submitted that the assessee has not received any

new subsidy during the year under consideration which requires

examination.

3. With regard to sundry creditors, the Ld. representative

submitted that the assessee is subjected to scrutiny assessment for

the 7th consecutive year. The assessee has filed confirmation letter

for the credit of `2.5 Crores from Shri A.G. Naser Ahmed and also a

confirmation letter from M/s Naser Tanning Company. Of course,

these confirmation letters were not referred in the assessment

order. That does not mean that the Assessing Officer has not

examined the same. Similarly, the sales commission and the

payment made in violation of Section 40A(3) of the Act, VAT 4 I.T.A. No.389/Mds/15

returns, charity and donation, job work charges were all examined

by the Assessing Officer. Referring to the commission said to be

paid by the assessee, the Ld. representative submitted that it is not

correct to say that the assessee has paid commission of 28.32% on

domestic sales. No one could pay the commission of 28.32%.

According to the Ld. representative, the commission paid was only

3% to 5%. Therefore, the Commissioner has wrongly assumed the

jurisdiction.

4. On the contrary, Shri Joe Jebastian, the Ld. Departmental

Representative, submitted that during the course of assessment,

the assessee claimed expenditure for payment of sales

commission, donation, job work charges, etc. The assessee has

also made certain payments in violation of Section 40A(3) of the

Act. The Ld. D.R. further submitted that the assessee has not

included the Duty Drawback to the extent of `3,50,04,823/- in the

income. The Ld. D.R. further submitted that the assessee has

shown sundry creditors in the year ended 31.03.2011 at

`4,33,77,843/- as against `4,46,46,939/- for the year ended

31.03.2010. The Assessing Officer has not examined any of the

material received from Shri A.G. Naser Ahmed and M/s Naser

Tanning Company nor there was any discussion in the assessment 5 I.T.A. No.389/Mds/15

order. The assessee also claimed the agency commission of

`64,33,064/- and local agency commission of `1,15,52,348/-.

Though the Assessing Officer disallowed the claim of the assessee

in respect of foreign agency commission under Section 40(a)(ia), no

enquiry was conducted with regard to commission paid locally. The

TDS details in respect of local agency commission was also not

available on record. The assessee has also paid cash exceeding

`20,000/- in contravention of Section 40A(3) of the Act. The

Assessing Officer had not made any enquiry with regard to this and

there is no reference made in the assessment order. For all these

reasons, the Commissioner found that the Assessing Officer has not

applied his mind to the material available on record. The

Commissioner has concluded that the Assessing Officer had not

conducted any necessary enquiry. Therefore, the order of the

Assessing Officer is erroneous and prejudicial to the interests of

Revenue.

5. We have considered the rival submissions on either side and

perused the relevant material on record. The Commissioner found

that the assessee claimed Duty Drawback from income, payment of

sales commission, payment of cash exceeding ` 20,000/-, VAT

returns, charity and donation, job work charges as expenses in the 6 I.T.A. No.389/Mds/15

return of income. The Assessing Officer has not made any

reference in the assessment order about all its genuineness or

allowability of the claim. In other words, the order of the Assessing

Officer is silent on these issues raised by the Commissioner.

6. The assessment proceeding before the Assessing Officer is

a judicial proceeding under Section 136 of the Act. Therefore, the

Assessing Officer is bound to pass a speaking order. In other

words, the reason for conclusion reached shall be reflected in the

assessment order itself. The Assessing Officer is expected to

dispose the issues raised by the assessee and record his own

reasoning for allowing or disallowing the claim of the assessee, in

accordance with law. The order of the Assessing Officer is subject

to further appeal/revision before the higher authorities. Therefore,

recording of the reasons is all the more mandatory for the

appellate/revisional authorities to appreciate the reasons for the

conclusions reached by the Assessing Officer in his order. It is a

well settled principle of law that the reasons for conclusion reached

in a judicial order shall contain in the impugned order itself. In other

words, reason for the conclusion arrived in a judicial/administrative

order cannot be substituted by way of filing additional document or

affidavit before the higher forums. In this case, admittedly, the 7 I.T.A. No.389/Mds/15

Assessing Officer has not discussed anything in the assessment

order regarding issues raised by the Commissioner. Hence, it

shows non- application of mind by the Assessing Officer. This

Tribunal found that the Apex Court in the case of Toyota Motor

Corporation v. CIT (2008) 306 ITR 52 (SC) had an occasion to

consider an identical issue wherein the Apex Court observed as

follows:-

"We are not inclined to interfere with the impugned order of the High Court. The High Court has held that the Assessing Officer had disposed of the proceedings stating the penalty proceedings initiated in this case under section 271C read with section 274 of the Income- tax Act, 1961 are hereby dropped. According to the High Court, there was no basis indicated for dropping the proceedings. The Tribunal referred to certain aspects and held that the initiation of proceedings under section 263 of the Income-tax Act, 1961 (in short, "the I. T. Act") was impermissible when considered in the background of the materials purportedly placed by the assessee before the Assessing Officer. What the High Court has done is to require the Assessing Officer to pass a reasoned order. The High Court was of the view that the Tribunal could not have substituted its own reasonings which were required to be recorded by the Assessing Officer. According to the assessee, all relevant aspects were placed for consideration and if the officer did not record reasons, the assessee cannot be faulted.

We do not think it necessary to interfere at this stage. It goes without saying that when the matter be taken up by the Assessing Officer on remand, it shall be his duty to take into account all the relevant aspects including the materials, if any, already placed by the assessee, and pass a reasoned order."

We find that the Punjab &Haryana High Court had an occasion to

examine this issue in CIT v. Sunil Kumar Goel [2005] 274 ITR 53. The Punjab &Haryana High Court, after considering the judgment of 8 I.T.A. No.389/Mds/15

the Constitutional Bench of the Apex Court in S.N.Mukherjee v. Union

of India, AIR 1990 SC 1984, has observed as follows:

" In S.N.Mukherjee v. Union of India, AIR 1990 SC 1984, a Constitution Bench of the Supreme Court discussed the development of law on this subject in India, Australia, Canada, England and the United States of America and after making reference to a large number of judicial precedents, their Lordships culled out the following propositions (page 1995) :

"The decisions of this court referred to above indicate that with regard to the requirement to record reasons the approach of this court is more in line with that of the American Courts. An important consideration which has weighed with the court for holding that an administrative authority exercising quasi- judicial functions must record the reasons for its decision, is that such a decision is subject to the appellate jurisdiction of this court under article 136 of the Constitution as well as the supervisory jurisdiction of the High Courts under article 227 of the Constitution and that the reasons, if recorded, would enable this court or the High Courts to effectively exercise the appellate or supervisory power. But this is not the sole consideration. The other considerations which have also weighed with the court in taking this view are that the requirement of recording reasons would (i) guarantee consideration by the authority; (ii) introduce clarity in the decisions; and (iii) minimise chances of arbitrariness in decision making. In this regard a distinction has been drawn between ordinary courts of law and tribunals and authorities exercising judicial functions on the ground that a judge is trained to look at things objectively uninfluenced by considerations of policy or expediency whereas an executive officer generally looks at things from the stand point of policy and expediency.

Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this court in holding that an administrative authority must record reasons 9 I.T.A. No.389/Mds/15

for its decision, are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances of arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review. It may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge."

In Testeels Ltd. v. N. M. Desai [1970] 37 FJR 7; AIR 1970 Guj 1, a Full Bench of the Gujarat High Court has made an extremely lucid enunciation of law on the subject and we can do no better than to extract some of the observations made in that decision. The same are (headnote of AIR 1970 (Guj):

"The necessity of giving reasons flows as a necessary corollary from the rule of law which constitutes one of the basic principles of the Indian Constitutional set-up. The administrative authorities having a duty to act judicially cannot therefore decide on considerations of policy or expediency. They must decide the matter solely on the facts of the particular case, solely on the material before them and apart from any extraneous considerations by applying pre-existing legal norms to factual situations. Now the necessity of giving reasons is an important safeguard to ensure observance of the duty to act judicially. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and excludes or, at any rate, minimises arbitrariness in the decision-making process.

10 I.T.A. No.389/Mds/15 Another reason which compels making of such an order is based on the power of judicial review which is possessed by the High Court under article 226 and the Supreme Court under article 32 of the Constitution. These courts have the power under the said provisions to quash by certiorari a quasi-judicial order made by an administrative officer and this power of review can be effectively exercised only if the order is a speaking order. In the absence of any reasons in support of the order, the said courts cannot examine the correctness of the order under review. The High Court and the Supreme Court would be powerless to interfere so as to keep the administrative officer within the limits of the law. The result would be that the power of judicial review would be stultified and no redress being available to the citizen, there would be insidious encouragement to arbitrariness and caprice. If this requirement is insisted upon, then, they will be subject to judicial scrutiny and correction."

If the order passed by the Tribunal is scrutinised in the light of the aforementioned proposition of law, we do not find any difficulty in setting aside the same on the ground of violation of the rules of natural justice. The flowery language used by the Tribunal to justify its acceptance of the respondent's plea that he did not know the law does not warrant our affirmation. In our opinion, the Tribunal was duty bound to record tangible and cogent reasons for upsetting well reasoned orders passed by the Assessing Officer and the Commissioner of Income-tax (Appeals). It should have directed its attention to the language of sections 271D and 271E of the Act in conjunction with other provisions of the same family and then decided by a reasoned order whether the respondent had been able to make out a case for deleting the penalty. The order passed by the Tribunal should have clearly reflected the application of mind by the learned members."

7. In view of the above, this Tribunal is of the considered

opinion that it is obligatory on the part of the Assessing Officer to

disclose the reasons for the conclusion reached in the assessment

order. The application of mind to the material available on record 11 I.T.A. No.389/Mds/15

shall be reflected in the assessment order itself. Therefore, this

Tribunal is of the considered opinion that the order of the Assessing

Officer is erroneous and prejudicial to the interests of Revenue.

Therefore, this Tribunal do not find any infirmity in the order of the

lower authority and the same is confirmed.

8. In the result, the appeal of the assessee is dismissed.

Order pronounced on 29th May, 2015 at Chennai.

sd/- sd/- (A.Mohan Alankamony) (N.R.S. Ganesan) (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) लेखा सद य/Accountant Member या यक सद य/Judicial Member

चे नई/Chennai, th 5दनांक/Dated, the 29 May, 2015.

Kri.

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